The Uber Valuation Effect...

Earlier
this month, investors poured $1.2 billion into Uber, a tech
company whose smartphone app connects taxi drivers to passengers. The share of
the business these investors received suggests that Uber is worth $17 billion,
a mind-boggling sum for a young company with only a few hundred million dollars
in revenue. That said, Uber isn’t the only highly valued tech company these
days, with others like Airbnb and Dropbox each valued at about $10 billion
by investors.

For all
these companies, the key selling point is “disruption,” one of the tech industry’s
worst buzzwords. The companies argue that they’re upending existing ways
of doing business — hailing a taxi, with Uber, or finding lodging, with Airbnb
— and given the sizes of the businesses they’re supposedly disrupting, the
sky’s the limit when it comes their value. But is Uber, which was founded
five years ago, really worth $17 billion? My answer, as I hope to detail below,
is only if we make some big assumptions about the taxi market and Uber’s
place in it.

The
value of any business, no matter what it does and where it is in its life
cycle, is based on its capacity to generate real cash flows. For young firms
like Uber, the expected cash flows are in the distant future, and estimating them will require making big assumptions
about how the market and the competition will evolve.

To
value Uber, we first need to understand how Uber makes money. It does not own
taxis or hire drivers; rather, its role is one of a matchmaker.1 Its value comes from its screening of drivers and cars (to ensure
both safety and comfort), its pricing and payment system (customers choose the
level of service, i.e. taxi, black car or SUV, are quoted a fare and pay via the app) and its
convenience (customers can track, on their phones, the car that’s picking them
up). Customers pay Uber, and Uber takes 20 percent of the fare, while the rest
goes to the drivers.2 Uber’s growth potential rests not only
on being able to claim a larger share of the car-service market but also on
expanding this market by attracting those who use public transportation or
drive their own cars.

As
a private company, Uber is not obligated to share its financial information
with the public, though leaks of revenue figures and gross receipts have
played nicely into its narrative of growth. A leaked document in December,
for example, suggested that the company generated gross receipts (the fares
paid by customers for rides) of $1.1 billion in 2013, which would
translate into revenues of $220 million.

If
we buy into the assertion made by Travis Kalanick, Uber’s founder and CEO, that
the company’s revenues are doubling every six months,
updated values for both gross receipts and revenues should be higher. In
estimating Uber’s value, I’m going to assume $1.5 billion and $300 million as
my base year’s gross receipts and revenues. (There are whispers that even these numbers are too
low, but as we will see below, the effect on value of using a higher starting
number is less than you might think).

One
way to value a company is to estimate the present value of its future cash
flows. How you estimate Uber’s future cash flows depends, mostly, on three
things: the size of its potential market, the size of Uber’s share in that
market, and what percentage of gross receipts Uber takes. The assumptions you
make on each question can dramatically affect Uber’s valuation, so let me walk
through mine.

For
my base case valuation, I’m going to assume that the primary market Uber is
targeting is the global taxi and car-service market. I know that there is talk
(some from Uber’s management and analysts) that Uber could extend its reach
into other businesses such as car rentals, moving services and even driverless
cars, but I don’t see evidence that it has succeeded in making any
breakthroughs yet.

The
global market for taxis and car services may be a big one, but it’s very
splintered, with lots of small, local operators dominating each city. In many
cities, it’s also a cash business, so there’s no easy way to track the total
revenues generated by operators. But, there is some data we can build on. For
instance, there seems to be a consensus that the most lucrative cab market in
the world is in Japan, where yearly revenues are estimated to be about $20 billion to $25 billion just in Tokyo,
followed by the United Kingdom with revenues of $14 billion, the bulk from London,
and the U.S. with $11 billion overall and about $3 billion in New York.
Assuming taxi revenues in the rest of the world add another $50 billion to this
total, I arrive at a total market of $100 billion.

It’s
true that many cities, especially in Asia and Latin America, are underserved
and that the global taxi and car-service market will continue to grow well
above 2 percent to 3 percent per year — a rate that we’ve observed in the U.S.,
Japan and the U.K. It’s also true that services like Uber will contribute to
that faster growth. I estimate an expected growth rate of 6 percent per year
for the next decade, increasing the overall market to $183 billion in 2024.

Estimating
Uber’s market share is a bit trickier. The taxi and limo market is regulated in
most cities. In other words, local governments restrict new companies from
entering the market and in return, they regulate the prices that cabs can
charge their customers. While Uber has only a minuscule slice of the overall
revenues today, the market share it can aspire to gain will depend on at least
three factors: drivers’ and passengers’ openness to a different way of doing
business, the competition and regulation.

The
good news for Uber is that the market is splintered; there are no large and
established players and very few publicly traded companies in this space. The
bad news is that the market will be tough to dominate. Unlike technology
companies in other businesses, like Google, Facebook and eBay, the network
effect and winner-take-all benefits are limited. Having a global network
of tens of thousands of cabs doesn’t make a difference to a customer looking
for a cab in New York City. That, along with the regulatory restrictions
protecting the status quo and the competition Uber faces from Lyft, Hailo and
others, lead me to estimate a market share of 10 percent.

Increased
competition has already forced Uber to cut its take of gross receipts in
some cities. My instincts tell me that Uber’s slice will decrease over time,
but I’m going to make the optimistic assumption that the company will find a
way to differentiate itself and continue to claim 20 percent of gross receipts.

Other
assumptions are going to affect my estimate of Uber’s value: how much it costs
to operate the company,3 how much it spends to grow the
company,4 the tax rate it pays,5 and how costly it is for Uber to
borrow money or attract new investors.6

You
can see the end results of these assumptions and explore the data in this Excel file, but the narrative is
a simple one. Uber not only becomes the largest and most profitable player in
the car-service business, it also plays a role in expanding that business. It
retains a strong competitive edge, allowing it to generate much higher profit
margins than the competition, while becoming a safer investment over time. I
estimate Uber’s risk-adjusted value to be $5.9 billion.

In
the table below, you can see how changes in my assumptions about total market
size and Uber’s market share, while holding everything else constant, affect
the valuation. Let’s allow for a potential market larger than $100 billio

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Mr Jiménez is the
Chairman of maat International (www.maat-g.com), the holding company for one of
the most innovative and fast growing privately owned Corporate &
Technology& Infrastructure Professional Services (est. 1999). His
leadership and business experience accumulated both in Public and Private
Sector marked a change in the Corporate Strategy of Professional Services in
order to diversify maat International offering into the Corporate Services
(Multilateral Agencies, Investment Funds, Private Equities, Development
Funds,…); Property Development, Housing,Energy, Transport Infrastructures, Agriculture and Trading industry in
Africa and LATAM and Research & Development in it the Cloud Computing
industry. He has been a venture capitalist in various companies and he is a
foundi…